17th February 2012
This is Bernanke's original speech: "Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.
"The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation."
This was in 2002, long before the start of the crisis, but it has been revisited by a number of bloggers. Wes Bridel on the Kingdom Calling website runs through the speech and draws the conclusion: "He basically says, well, if we've done all that and we have zero interest rates, and we still don't have the growth and inflation that we want, we've got to get a bit more "speculative", which is all very unlikely to happen anyways, of course!
"Ok, he starts this most important paragraph by saying that even though he said devaluation is bad, it can still be good. Remember, this is your money that he would be making 40% less valuable (meaning your food & gas bill among others would skyrocket overnight although surely your paycheck would NOT skyrocket!"
It has also been picked up by Forbes columnist Charles Kadlec. He points out that after its latest two day meeting, the Fed explicitly said it planned to devalue the dollar by 33% over the next 20 years: "The debauch of the dollar will be even greater if the Fed exceeds its goal of a 2 percent per year increase in the price level."